Steel stocks rallied strongly after the presidential election, with Republican campaign pledges to rebuild U.S. infrastructure underpinning strong buying interest. The sector has gained little ground in the first quarter, despite table pounding by Wall Street and the financial media, held firmly in place by skepticism that Trump's promises will have a tough time transforming into profitable legislation.
VanEck Vectors Steel ETF (SLX) became the only broad-based steel play after rival PowerShares Global Steel ETF (PSTL) delisted in February 2016. Its trading volume escalated above sleepy levels in the fourth quarter, in reaction to growing sector interest, but still, attracts less than 200,000 shares per day on average. It has a relatively high expensive ratio at .55% counter-balances a tight .14% spread, offering a reasonable choice to play the upcoming infrastructure debate.
SLX Long-Term Chart (2006–2017)
The sector fund came to life on the NYSE exchange in October 2006, opening for business in the low-40s. It turned higher into 2007 and continued to gain ground into May 2008 when it posted an all-time high at $112.12 and turned sharply lower. The bottom dropped out during the economic collapse in the second-half of the year, dumping the instrument to $20.21 in November.
It spent the next six months building a double bottom reversal, ahead of a recovery wave that continued into 2010, reversing at the 50% selloff retracement in the upper-60s. New support in the low-50s held through multiple tests, yielding a 2011 bounce that reached the .786 retracement level in the upper-70s, with that peak marking the highest high in the last six years.
It reversed and sold off at the same time that commodities were topping out around the world, initiating a long series of lower highs and lower lows that reached the 2008 bear market low in the fourth quarter of 2015. The fund broke down into 2016, posted an all-time low at $15.30 and bounced strongly, lifting back above broken support. This bullish price action set off a long-term 2B buy signal, which denotes the failure of bears to hold a new resistance level.
The rally continued into the end of 2016, stalling after it mounted resistance at the horizontal lows posted between 2012 and 2014 (red line). Meanwhile, the long string of lower highs and lower lows continues, requiring a buying spike into the green line at $50 to break the bearish trend. As a result, the fund has now reached a major inflection point, with a breakout confirming a new uptrend while a selloff signals the end of the bounce and start of a test that could bring the 2016 low into play.
SLX Short-Term Chart (2015–2017)
The 2016 bounce remounted the broken 200-day EMA in April 2016 and tested that level for more than five months, ahead of a strong fourth quarter rally that stalled at the .786 retracement of the 2013 to 2016 decline. Three tests since December at that harmonic level have failed to pierce resistance, contributing to a pullback that’s dropped the fund under the 50-day EMA. However, it’s still holding rising channel support (blue lines), suggesting the decline will offer a low risk buying opportunity.
On Balance Volume (OBV) bottomed out in the first quarter of 2016 after a multiyear distribution phase and gained ground at a rapid pace into April. Consolidation through the middle of the year gave way to a fourth quarter buying spree that’s lifted the indicator to a 6-year high, signaling impressive institutional sponsorship that favors much higher prices in coming months.
The Bottom Line
Steel stocks have paused after a 2016 rally stalled in December. Meager first quarter gains could set up stronger returns through mid-year as U.S. infrastructure spending rises to the top of the Republican Congress’ to-do list.
<Disclosure: the author held no positions in aforementioned stocks or funds at the time of publication.>